Vice-president of ARP Instruments, Inc., David Friend, Newton, Massachusetts, USA, 1977. (Photo by … [+]
It’s hard for startups to raise money these days. So when a startup raised a quarter of a billion dollars last month, it got my attention. Such odds-defying startups offer valuable lessons for all startup CEOs.
This comes to mind in considering the news that Boston-based cloud storage company, Wasabi Technologies, closed a $250 million round of funding last month at a $1.1 billion valuation, according to a company press release.
Wasabi has won over “tens of thousands of customers” to its cloud storage service. Co-founded by Carbonite co-founders David Friend and Jeff Flowers, Wasabi says that it “enables organizations to store and instantly access an unlimited amount of data at 1/5th the price of the competition with no complex tiers or unpredictable egress fees.”
Based on my October 4 interview with CEO Friend — who started his career selling synthesizers to the likes of the Stevie Wonder — it is clear that the two keys to Wasabi’s success in this funding round were Friend’s persistence and a compelling investment proposition.
Specifically, Wasabi sports five attributes that any startup CEO should present to potential investors:
- Large, growing addressable market
- Annual doubling of revenue
- Enormous barriers to entry
- Compelling customer value proposition
- Effective geographic expansion strategy
Friend’s Persistence
The amount of venture investment in startups is way down — but not out. For example, venture funding for the third quarter of 2022 fell 53% from the year before to $81 billion, according to Crunchbase News.
What’s more, the IPO market — which in general offers startup investors their best chance for profit — is almost completely shut down for now. According to CNBC, through July 2022, IPO issuance plunged 95% to $4.9 billion while total equity issuance fell 80% to $57.7 billion.
Friend was looking to raise money from private equity firms rather than venture capitalists. And PE firms had very little appetite for startups when Friend went looking for capital.
As he said, “Public stocks were selling for a third of their price 30 days ago despite no change in their business. PE firms saw no reason to make illiquid investments when lower risk public deals were looking cheap.”
Friend talked to many investors who were interested but did not want to take the lead. “Over a four to six month period, I pitched to investors and they told me, ‘When you get a lead investor, call us. We don’t want to lead.’ We found a lead investor who met our requirements — we got a $1.1 billion market capitalization. Once we signed up a lead investor, the round was oversubscribed.”
Here is more on what makes Wasabi’s investment pitch so compelling.
Large Addressable Market
Investors like to bet on companies that are targeting large markets. Typically, they do not expect a startup to gain more than 10% of a market and in order to go public, a startup must have at least $100 million in revenue. So to attract investors, startups must be targeting a market of at least a few billion dollars.
Wasabi vastly exceeds that low bar. As Friend told me, “Our total addressable market is infinite. 10 years ago, all data was stored on a company’s premises. By 2032 it will all be on the cloud. That’s when IDC says there will 100 zettabytes of data. That is a $10 trillion, once-in-a-generation market opportunity.”
Doubling Revenue
Above all, investors get excited about companies that are growing fast. If they are also targeting large markets, a public offering of their shares comes almost close enough to touch.
Wasabi has been growing very rapidly. “We enjoyed two-fold growth between 2020 and 2021 and expect to grow that fast by the end of 2022. We have high net retention and the need for data storage is in hypergrowth mode. Despite a recession, companies have to back up data. It’s not like a new human resources system that you can defer for a year or two,” said Friend.
High Barriers to Entry
In theory, Wasabi’s enormous market opportunity and rapid growth should be an appealing target for new entrants.
While the opportunity may look appealing, Wasabi has built major barriers against competitive entry. As he explained, “If you are a cloud data storage service provider with a data center in Virginia, how can you compete with us? We have engineers with a decade of experience in data storage at exabyte scale. The scaling problem that we have solved— our data centers are in the U.S., London, Frankfurt, and Asia/Pacific — is technically challenging and capital intensive. What’s more we have 44,000 customers and 3,000 channel partners.”
Compelling Customer Value Proposition
Customers buy from Wasabi because it offers the most compelling value proposition. As Friend explained, “We are the Walmart
WMT
Gartner
IT
AMZN
Effective Geographic Expansion Strategy
Investors also want to see a clear growth trajectory. Wasabi expands into new territories before rivals do by selling through “the best channel partners.”
These channel partners used to buy and resell storage hardware so they have extensive relationships with companies in their regions. “Wasabi offers these channel partners much higher margins. A channel partner can sell storage hardware at an 11% markup. They can markup Wasabi by 20%,” said Friend.
Wasabi’s valuation has increased significantly over the last several years. As I wrote in January 2021, the company was valued at a $230 million post-money valuation when it closed its last round of equity financing in May 2020. In early 2021, Friend said he hoped Wasabi would reach a valuation of $1 billion within 24 months.
He got there sooner than that. While now does not seem like an ideal time, Friend is aiming for an IPO as a big step on the way to making Wasabi a “societally important company.”
If startup CEOs can offer investors the five attributes that helped Wasabi top a $1 billion valuation, they too could defy the odds and raise the funds they need in this challenging time.
